June 12, 2012
Furthermore, Keen elaborates, this supposedly representative consumer “decides how much labor to supply by solving a utility function that maximizes his utility over an infinite time horizon, which he rationally expects and therefore correctly predicts.”
The least that can be said about this is that it is a whale of a set of assumptions. What is most striking about the assumption of a representative agent is how out-of-keeping it is with what we might suppose to be the primary virtue of capitalism – that it can satisfy the widely-varying tastes of a broad spectrum of disparate individuals.
It cannot be overlooked by the economics profession that its models are unrealistic, so economists fall back upon a doctrine associated with Milton Friedman – that it doesn’t matter whether the models accurately depict the real world or not; all that matters is that they “work” – that is, that their results fit reality.
This is a dangerous tenet when the models in question have many adjustable parameters and can be programmed into a computer. Thus, through data-mining and trial and error, an economic researcher has more or less free reign to design completely unrealistic models and then to tweak their inputs until they meet Milton Friedman’s criterion for validity.
Keen also dresses down economists for their reliance on static calculations. Neoclassical models unrealistically model the economy statically at a point in time, supposedly because doing so is a step toward the much more difficult problem of modeling dynamically over time; and anyway, neoclassicists tacitly assume, the model over time is just a lily-pad process of jumping from equilibrium to equilibrium. But if you learn to ride a bicycle by first learning to sit on it and stay upright, then learn movement through time and space second, it won’t work because the dynamics of sitting on a bicycle statically and moving dynamically are different. So, too, Keen analogizes, with the economy – you can’t just assume it jumps from equilibrium to equilibrium, and each equilibrium can be taken as separate, because in between each point there is disequilibrium; in fact, a process of disequilibrium over time is really what it’s all about.
What are Keen’s alternatives? He does a brief, but informative survey at the end of the book of the alternative economic theories that have been proposed, from Austrian economics to complexity theory. Somewhere in these may lie a better path forward. Keen also makes an argument for his own post-Keynesian views. These, however, do not seem sufficiently out of the mainstream to challenge the whole edifice of economics commensurate with his scathing attack. He proposes, for example, that part of the change in aggregate demand is the change in debt. This kind of suggestion has significant implications for central bank policy, but it doesn’t adequately address all of the fundamental criticisms that Keen has leveled against the field.
The institution of mainstream economics is under attack, and it is faltering. Multiple heterodoxies have arisen, accumulating adherents who debate endlessly. Similar periods in history gave birth to new intellectual models and paradigm shifts. Will all this ferment fundamentally alter the field of economics itself? It is possible, but first economists will have to find a way out of their tangled web of assumptions.
Michael Edesess is an accomplished mathematician and economist with experience in the investment, energy, environment and sustainable development fields. He is a Visiting Fellow at the Hong Kong Advanced Institute for Cross-Disciplinary Studies, as well as a partner and chief investment officer of Denver-based Fair Advisors. In 2007, he authored a book about the investment services industry titled The Big Investment Lie, published by Berrett-Koehler.
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